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Contemporary Egyptian non-sense part 1: Suez Canal in Pounds!

In modern days Egypt, so many ideas grow out of the blues captivating the minds and souls of the population. Some of these ideas are political, economical, or social. While some fade away fast, others never seem to go out of fashion, surfacing every now and again as if begging to be shot down. Over …

In modern days Egypt, so many ideas grow out of the blues captivating the minds and souls of the population. Some of these ideas are political, economical, or social. While some fade away fast, others never seem to go out of fashion, surfacing every now and again as if begging to be shot down. Over the course of the coming weeks, we will take a look at some of this contemporary nonsense with the aim of setting the record straight on some of those die hard ideas. We start with one such suggestion that never tires of making a comeback: Why not change the payment currency of the Suez Canal to Egyptian pounds?

The Myth:

Many supporters of the idea do believe that collecting Suez Canal fees in Egyptian pounds would generate a sizeable demand on the Egyptian pound. As all the ships passing through the canal would have to pay in pounds, this would boost the value of the ailing Egyptian currency in international markets, leading to a stronger pound. This is seen by advocates of the idea as a good step, as it will reflect positively on the national economy and could reduce the cost of Egypt’s debt.

The Reality:

The theory carries a fundamental flaw, which is that maintaining a stronger currency is a good thing. We are not even going to go there because, in short, collecting the Suez Canal fees in Egyptian pounds will not make the pound any stronger.

First, from a purely economical perspective, increasing the global demand for the Egyptian pound will not necessarily cause an increase in its value. This is too simplistic of a view because there are a lot of other determinants that impact the currency’s value: determinants such as economic growth rate, inflation rate and interest rates all impact the currency’s valuation. Not that Egypt currently needs a strong pound in the first place!

Second, by looking at Egypt’s balance of payment (BOP), which accounts for all monetary transactions between the country and the rest of the world, Egypt habitually runs a deficit; this means that the country does need foreign currency to meet its budgetary obligations. Now, if we were to convert the annual Suez Canal revenue estimated at $5bn into pounds, this will in turn create shortage in hard currency required by the government to cover its imports needs. This is especially true since ships passing through the canal will have to obtain the currency from local banks. This will simply lead to a redistribution of foreign currency mainly to the private sector.

Third, one must also realise that while revenues from the Suez Canal may appear significant, they only represent 3% of GDP, so it is unlikely that they will have a drastic effect on the valuation of the Egyptian pound should fees be collected in the local currency.

Finally, we must also realise that almost all of global maritime transactions are conducted in US dollars. Therefore, it will be an interesting request to stipulate that Suez Canal fees are to be collected in Egyptian pounds.

As current Prime Minister Hazem Al-Biblawi once noted, the demand for converting Suez Canal fees to Egyptian pounds “has an emotional dimension rather than economical one”. Other experts concur, noting that the idea is no more than “non-specialised fanaticism”.

The idea falls within the realm of several other ideas that are hoping to get an economical lift without proper structural changes and real economic growth. Unfortunately, Egyptian economic troubles are unsolvable by one move; at least not this one!